Q&A: Paul Polak, author of Out of Poverty

Multinational companies are -- at their own peril -- ignoring a major market, according to Paul Polak. They're missing out on more than two billion customers who wouldn't just increase their profits, but could ensure their long-term survival.

Multinational companies are -- at their own peril -- ignoring a major market, according to Paul Polak. They're missing out on more than two billion customers who wouldn't just increase their profits, but could ensure their long-term survival. Who are these consumers? They're people living on less than $2 a day -- and they make up about 40 percent of the world's customers.

Thirty years after starting a business selling products that helped small farmers in developing countries grow their crop yield, Polak is now launching global companies aimed at changing the lives of hundreds of millions of poor people worldwide. His projects range from developing a factory for producing an affordable coal alternative to teaching students to design products for the "other 90 percent," people living on $600 a year or less. I spoke with Polak last week. Below are excerpts from our interview.

You're a psychiatrist by trade. How did you come to shift your focus to the world's poor?

When I was working as a psychiatrist in southwest Denver, I was in charge of a mental health system serving about 100,000. People who were chronically mentally ill benefited more from poverty strategies than formal psychiatric therapies. I started working on improved housing and other opportunities for the chronically mentally ill. Being able to hold a job and have a regular income and improved self-esteem significantly reduced readmission rates to hospitals. I realized that people who were chronically mentally ill in Denver were living on $600 a month. And there were people in the world living on $30 a month.

We started treating the chronically mentally ill as customers for mental health services rather than as patients. I did the same thing for one acre farmers I met in Bangladesh. That was so fascinating that I ended up spending all of my time on practical solutions for poverty for people who lived on $1 or $2 a day.

In your TED talk, you said we need a revolution in the way products are designed, priced, marketed and delivered. What would that look like? Are we seeing any of these changes yet?

All of Western design and Western businesses focus virtually all their attention on the richest 10 percent of the world's customers. The other 90 percent are pretty much ignored. In business terms, that's a new growth market opportunity. This population starts at an income of about $600 a year. There are encouraging beginnings of markets serving that population. One very clear example is mobile phones. That's a purely commercial, new movement and it has reached virtually every person. Even someone on $1 or $2 has access to a cell phone, whether or not they can afford to buy one. That's a whole new market.

We need a revolution in how businesses design, price, market and deliver their products because on $2 a day customers can't afford the cost of products designed for wealthy customers. The design process is based on what I call the ruthless pursuit of affordability. That doesn't mean you make shoddy products. You change the design criteria. You have to change the distribution pattern. Many people who live on $2 a day live in small villages. There's a real challenge in creating last mile supply chain. We have to create whole new distribution and marketing systems to reach these populations. It's a vast new market. You can't just take products that are popular for wealthy customers and make cosmetic changes to them and sell them to poor customers. You have to create a new product line with new criteria that are attractive to poor customers. But if you do, there vast new profits.

You say treating the world's poor as potential customers can help businesses with their bottom line. So why don't companies do this?

The first misperception is that you can't make money in emerging markets. There have been a lot of examples that you can. Secondly, many businesses don't have a clue how to design products that would be affordable enough to be attractive to the other 90 percent and have the features those customers value. Third, most multinationals don't have a clue how to distribute to small rural villages in a way that is economically profitable. Those are three of the biggest reasons why businesses aren't investing in this space. But there are lots of examples of major profitability in emerging markets.

What are some specific opportunities for businesses that want to reach the other 90 percent?

Big companies are realizing they can't continue to operate under the assumption of unlimited access to energy and world resources. The energy is not in unlimited supply. There's an increasing realization of carbon emissions having a negative effect on the environment through climate change.

Here's an example: coal currently contributes 40 percent to carbon emissions globally. There are six billions tons of coal consumed each year. At the same time, the planet produces four billion tons of agricultural waste products like peanut shells. If we could harness one billion tons of agricultural waste and add another billion tons of invasive plant, making electricity could be transformed by using various versions of compressed biomass. The problem is that a lot of that biomass is at scattered, rural locations. One opportunity is new technology European firms are investing in called torrefaction. The plants European utilities are designing start at $10 million. You can design the plants for much less [because the torrefaction] process is not that complicated. One of the companies I started is designing a $10,000 torrefaction plant with a four kilometer collection radius. One of these plants will produce five to seven tons of marketable coal replacement. You could essentially lower global carbon emissions by 10 to 15 percent by taking advantage of agricultural waste and invasive plant and converting them into a coal replacement. Each of these village enterprises that makes a biomass coal replacement might cost $10,000 to $20,000 and generate income at the village of $700 a day. It would be transformative for poverty. It would create new employment. It would create more affordable energy sources. It would make a positive impact on global carbon emissions.

That's one example. There are many others like that. Nobody has tried to build a $10,000 torrefaction plant. We're in the R&D phase of building and testing that plant in India. If that works, I'm forming a global company that will spread that approach all over the world. I'm in the process of creating four global companies, each of which has the capacity of reaching 100 million $2 a day customers generating $10 billion a year in sales and making an impact on world economies and the environment. I'm doing that to demonstrate that profitability and serving $2 a day customers at scale is not only feasible. It's necessary for the survival of many of the existing global companies.

You also sell products to people living on less than $2 a day. Talk about these products and the idea behind the slogan "cheap is beautiful."

Thirty years ago, I started International Development Enterprises. That's a development organization where I learned a lot of the things I've been talking about. That company has helped 20 million $1 a day small farmers move out of poverty. They did it by designing radically affordable irrigation equipment in the beginning. I started by interviewing at great depth $1 a day small farmers. I've done interviews with 3,000 families over 25 years. What they needed most to move out of poverty was to increase their income from farming. To do that, they needed affordable water control. If they could get affordable access to water during the dry season, they could get three times the price they get in the rainy season.

We started with a simple device called a treadle pump. It's like a StairMaster with a couple of bamboo treadles. Walking is the most effective muscular action that translates work into pumping water. In Bangladesh, water is only 15 feet down. You can install a treadle pump that allows you to pump water through a filter. A treadle pump costs $8 in Bangladesh. Drilling a tube well and putting a treadle pump on top of it costs a total of $25. At that price, the manufacturer of the pump, the dealer and the village technician who installs the pump all make a profit. With that investment of $25, a farm family can grow half an acre of vegetables in the dry season and increase their income by $100 a year net on average. We worked through a network of 3,000 dealers and 75 manufacturers. That network sold 1.5 million treadle pumps. We applied that model to other products like low-cost drip irrigation.

You can't donate people out of poverty. They have to invest their own time and money to move out of poverty. When you sell them something at a fair market price, it changes the whole design process. You can't give away things you think would be nice. You have to design things that poor people will buy. That's a whole different process. Out of that came three rules that have been both widely criticized and adopted for designers for the other 90 percent:

If you haven't talked to at least 25 customers in some depth before you start, don't bother.

If it doesn't earn three times the investment cost in the first year, don't bother.

If you can't sell a million of them, don't bother.

We found many products that could generate a 300 percent net profit for the purchaser in the first year and that had a potential global market of at least a million. Since I've handed over IDE to my successor, I've used the same principles but lifted the bar to 100 million customers for each company I'm starting. We're creating companies in water, energy, health and education.

People often feel that poverty is an insurmountable problem that can't be solved on a personal or local level.What do you say to that?

In my book, Out of Poverty, I describe 12 practical steps for addressing any social problem whether it's in a country like Bangladesh or a poor rural area in California. The first three of those steps are the most important. They are:

Go where the action is - You can't come up with a solution to a problem of homelessness in your city by thinking about it. You have to talk to a lot of homeless people and learn what their lives are like.

Talk to the people with the problem and listen to what they have to say - Listening doesn't necessarily mean just the words. It's listening with your whole soul. Ninety percent of the information is not in words. Do they have a watch on their wrist? Are they overweight or short of nutrition? How many cabbages are they growing in their field?

Learn everything there is to know about the context of the problem - If you're talking about homelessness, look at the situation in which homeless people live. I spent a day with a homeless man named Joe. He had a need for safe storage. People who are homeless have things they value, but they need secure locker space. That resulted in finding an abandoned building and starting a locker business run by homeless people.

If you follow those three steps, my experience is that practical solutions that make a big impact just fall into your lap.